Alternative Lending Explained – Types, Risks & Who It’s For
- marketing29368
- 11 minutes ago
- 7 min read
To keep your business going or to prepare for the next investment opportunity, you need access to funds that don't always fit the traditional model. Alternative lending can offer a solution. Alternative lending provides access to funds with fewer limitations than traditional business loans. Consider how it may work in your situation.
What Is Alternative Lending & Why It Matters for Mid-Market Companies
Alternative lending is non-bank financing provided by private lenders, fintech companies, or marketplace platforms. These lenders typically offer greater flexibility and faster access to the capital mid-market companies need when traditional banks may not provide it.
Alternative lending can be traced back to the post-2008 financial crisis, when non-banks became critical resources for filling the need of borrowers in a liquidity void left by tight bank regulations. Then, they provided a stopgap solution. Today, alternative lending options offer far more, including enhanced borrowing that streamlines traditional lending processes.
With the inclusion of digital underwriting and real-time data, faster, more accurate decision-making is possible. This means greater accessibility to mid-capital companies that need money now, not in months.
As a result, alternative funding and non-bank lenders in general have become resources for firms that need flexibility through asset-backed funding for short-term liquidity or expansion. From peer-to-peer lending through marketplace lending platforms to digital underwriting from private lenders, it's more efficient to request financing and get access to the capital you need now.
How the Alternative Lending Process Works
Alternative lending still requires an application process, and with that comes access to critical data and verification of asset value. The funding process takes less time than traditional banks but offers a wide range of resources for companies.
There are several differentiators about this form of investing. Most often, the application process happens mostly online. It's also a low-documentation application that lacks business plans and detailed earnings spreadsheets.
Typically, investors or lenders review the financial details and specs of the company from a high-level view. This may include reviewing the company's cash flow, accounts receivable, and accounting-platform data, rather than relying solely on a credit score, making alternative lending a more accessible option for companies with bad credit.
With this process comes rapid funding timelines. This often means getting money in hand within 2 to 4 weeks. Thanks to online loan applications, investors are able to make better decisions sooner. That drives up approval rates.
However, it is not necessarily riskier for lenders. Notably, marketplace models connect borrowers directly with investor capital pools, those already likely to lend to them or handle the type and level of risk expected. Thanks to artificial intelligence (AI) and machine learning (ML) underwriting, lenders have better data that creates a clear picture of risk and potential opportunities.
What does this lead to? Data from the U.S. Chamber of Commerce indicates that approval rates are higher, averaging about 30% for alternative lenders compared to 13% for large banks.
Core Types of Alternative Lending Products
A variety of lending methods exist, each offering a different potential strategy for borrowers to obtain the financing they need. The following are some of the most commonly used options over a traditional bank loan.
Accounts Receivable Financing
Accounts receivable financing provides working capital now by allowing companies to borrow against the outstanding invoices owed to them. Companies maintain full control over collections of those accounts.
Additionally, accounts receivable factoring may also be a strategy, as it allows companies to convert accounts receivable into working capital by selling those invoices to an investor. This means the lender takes over the collection process, assuming all of the risk in collecting on those invoices.
Supply Chain Financing
Supply chain financing enables end-to-end supply chain optimization by optimizing upstream and downstream cash flows. The objective here is to strengthen relationships with suppliers to extend payment terms. This occurs without negative implications for delivery schedules.
Purchase Order Financing
This type of financing allows companies to access the funds they need now to fulfill already in place orders. That is done prior to invoicing being issued. The company gains access to the money it needs to meet customer demands.
Inventory Financing
This type of lending allows a business to purchase the inventory it needs, using the inventory itself as collateral. This enables better cash flow for the company and allows for improved management of seasonal shifts in demand.
Asset-Based Lending
Like inventory financing, asset-based lending focuses on building revolving credit lines that are based on the value of assets the company owns. That may include inventory, accounts receivable, equipment, or others.
Recourse vs. Non-Recourse Factoring and Implications
Recourse factoring holds the seller liable for any unpaid invoices. That means the business must buy back the uncollectible accounts from the factor. By comparison, non-resource factoring enables the factor to assume the risk of the customer not paying. This tends to make non-recourse financing more expensive for the business, but it can be a better option for reducing risks.
Custom Financing Solutions Exist
Companies like Goba Capital offer solutions that mix these strategies up. Custom financing solutions allow companies that do not fit the traditional standard mold to obtain funding through a mix-and-match strategy. This combines multiple structures to match specific liquidity profiles.
Alternative Lending Vs. Traditional Bank Loans
Significant differences exist in alternative lending vs. traditional bank loans.
Approval Ratings
You can start with the approval rating. As noted previously, 30% of alternative loans receive financing while only 13% of traditional bank applications do. That is due to the vastly different underwriting approaches. Banks require far stricter credit scores and collateral, limiting access.
Timing
Another difference is in timing. Banks take months to analyze and review data before making a decision. With alternative lenders, this approval time is typically 2 to 4 weeks instead.
Costs
Costs differ based on the alternative financing model. However, alternative financing models tend to charge more than traditional banks. The trade-offs are flexibility in lending and the speed of getting the funds needed in hand.
Who Is Best Served?
Alternative lending suits seasonal or short-term needs, especially for small business owners seeking flexibility, while banks remain ideal for long-term, lower-cost financing. In situations where a company does not need immediate access to funds or has the credit score to qualify for traditional funding, bank loans may be better suited because they are more affordable.
Benefits and Risks of Alternative Lending
All lending comes with the benefit of receiving the cash needed, and there are often risks associated with the process as well.
Benefits of alternative funding typically include:
Faster access to meet financial needs
Flexible qualifications beyond what a traditional bank allows
Improved cash flow to meet needs sooner than other solutions allow
Ability to seize growth opportunities now, without long waits that could miss critical opportunities.
Risks of alternative funding typically include:
Higher fees associated with borrowing
Shorter repayment terms, depending on the structure
Unregulated or opaque lenders, often with less clarity on who the lender is
To mitigate these risks, businesses should complete due diligence. That includes evaluating lender reputation, transparency, and compliance. Explore what the company's objectives, rules, and reputation are.
Goba Capital's partnership model offers greater transparency and more opportunities for borrowers. This is a trust-based model with a custom structure, enabling companies to have access to the information and resources they need in a way that works for them. Lender transparency is critical in these situations. Most importantly, it enables companies to avoid having to fit into a mold with a one-size-fits-all offer.
Eligibility & Choosing the Right Lending Partner
Requirements differ between the strategy and the lender. However, the ideal mid-capital company that benefits from alternative financing models are:
Asset-backed companies, those that own valuable assets that allow them to have collateral of some type
Companies with seasonal cycles
Companies with growth pressures that make traditional lending strategies less ideal
Companies will need to provide documentation of their assets and business objectives. Documentation needs tend to include:
Financials
Accounts receivable reports
Customer credit profiles
Proof of asset ownership
This tends to be far less demanding than what is required by traditional lenders. However, companies will use more than just financials to make decisions.
When choosing a lender, evaluate lenders based on:
Their transparency in what they offer, costs, and structure
The speed at which they can fund lending solutions
Structuring flexibility, including the type and number of flexible lending solutions they offer
Cross-border expertise when applicable to business objectives
Goba Capital’s strength in the US-LATAM transactions is one of the most important differentiators in this lender over others.
Market Growth & Emergency Trends in Alternative Lending
It’s critical to find lending that fits a business’s needs. That could include asset-based lending or alternative forms. Today’s average company no longer fits the mold of companies from 20 or more years ago. Lenders that adapt to this reach those borrowers with the most potential.
Higher approval rates among alternative lenders indicate the demand for their services. And, with AI/ML underwriting and digital data, it's possible for very precise and fast decisions to be made, changing the course of how lending happens.
With factors such as persistently high interest rates, supply chain volatility, and banks' continued risk aversion strategies, alternative funding is the gap-filling solution companies need. And, with investor appetite for private credit and increasing regulatory focus on transparency, this strategy works.
Real-World Use Cases & Goba Capital Solutions
In the real world, alternative funding methods make more sense and create solutions to cash flow problems. For example:
A manufacturer uses supply chain financing to stabilize supplier payments while awaiting accounts receivable
A commodity distributor leverages factoring for seasonal inventory surges
Goba Capital is already making a difference. With cross-border transactions supporting improved financial relations within the US and LATAM, outcomes have clearly improved. More so, the company operates through multi-jurisdictional financing complexities with confidence. That's especially true with the organization's ability to offer a mix-and-match model, breaking the mold of traditional financing even further.
Alternative lending is a proactive working-capital strategy. It is not a last-resort option. Rather, it is the ideal choice in most mid-capital companies where solutions hinge on fast access to capital. With companies like Goba Capital so readily available to offer solutions, more companies can reach further and do more.
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